When you’re trying to get fit in preparation for a race, it helps to know what distance you’re going for. A training plan for running a 5K will be very different from getting ready for a marathon. When you are trying to get funding fit, your end-goal matters just as much. When designing your fundraising strategy, you first need to know how much you want to raise.
A clear sense of how much money you need is essential because it directly affects which investors and funding sources you should pursue. If you just need a small influx of capital—say, less than one third of your annual revenue—then revenue-based financing offered by Lighter Capital may make sense. If building out your product requires a lot more capital to launch, you’ll need to look to angel investors or venture capital firms, depending on exactly how much you need.
There’s an even more fundamental reason to get specific about your fundraising goals: investors are not likely to invest unless you can clearly articulate how much you need—and what you plan to do with their money. After all, investors are focused on their return; if you can’t clearly articulate your funding needs, it shows a lack of sophistication that will likely hurt your credibility.
Finally, how much you choose to raise will have a substantial impact on the future of your company. Financial decisions like taking on debt or giving away equity affect your company for the long-term and are hard to reverse. Therefore, it’s critical to develop a fundraising strategy that aligns with your long-term growth plans.
Here are three considerations for determining just how much money you need.
1. Map out your milestones
To determine how much money you really need, you first must map out your next major milestones, such as hiring new employees, developing a new product or feature, increasing sales by a certain amount, or capturing a certain percentage of your market share.
Each milestone should have a discrete outcome and deadline, such as “Develop new app by month 6,” or “Hire a VP or Marketing by month 9,” or “Double sales by month 12.”
For each milestone, you must be able to articulate how much achieving that milestone will cost—and how that milestone will affect the company’s bottom line. Mapping out your milestones will not only help you determine just how much capital you need, it will also help you show investors the value of their investment at this particular stage.
2. Know how much it will cost to scale
Many investors are wary of placing their bets on a company that has no idea how, exactly, their investment will help grow the firm’s customer base or speed up its product development.
Investors want to know how much it will cost to gain new customers, how likely those customers are to stick around, and how much they will contribute, on average, to your bottom line. Solid data for customer acquisition cost, retention and churn, and life-time value allows investors to understand how much your company can grow with a given size of investment.
At Lighter Capital, we love to fund companies that have gained traction and need an injection of growth capital to scale their sales, marketing, and product development efforts, which can include expanding the team or spending more on advertising campaigns.
3. Weigh the consequences of equity dilution
A lot of entrepreneurs quit their corporate jobs to chase the dream of building something they believe in and want to own for the long haul. While exchanging capital for equity may seem like free money, since you don’t have to pay back right away, there are costs that many fail to anticipate. If your company is successful, equity money will be, by far, the most expensive outside capital.
In addition, there’s the risk of giving up control of your business; once outside investors own more than 50% of your company, you’re back to being an employee and working for someone else. Since the goal of any equity investor is to have an exit, typically 5-7 years out, the only options for a successful equity-funded company are to be acquired or to IPO. Is this what you want to do? If it is—and if you really need a large influx of capital to grow quickly—then equity can be an appropriate and valuable path to pursue. But if you simply want to build a company to last, it’s wise to construct a fundraising and growth plan that doesn’t require giving up on your dream of independence and ownership.
Get clarity and know your options
Whatever funding path you choose, VC-backed or not, do a deep dive before you raise money to confirm you have a clear sense of the outcomes and costs associated with each option. A deliberate fundraising strategy will elucidate what you need and who can provide the investments that will help you best reach your milestones and business goals.
Gearing up to fundraise?
This guide explains explains the most important components of a successful fundraising strategy and how to prepare.